Financial Discipline in FY26: Enacting Fiscal Restraint Without Significant Reforms
Budget Struggles in Pakistan's FY26: Higher Taxes Await; Will Fiscal Strain Persist?
Here's a lowdown on the pressing issues and potential solutions as Pakistan navigates its fiscal gap in the upcoming financial year:
The Grim Picture
Pakistan faces a tight tax base and a significant deficit in revenue collection, with the Federal Board of Revenue (FBR) already faltering to meet targets. The burden of adjusting to new tax measures will likely fall heavily on the formal sector, threatening to curb economic expansion and boost informality [1][2].
Space for spending reductions is limited, with defense spending receiving IMF approval, and the development budget set to be trimmed if anticipated tax revenues don'tmaterialize [1]. Structural issues persist within tax administration and customs enforcement, hampering efforts such as the National Tariff Policy [1]. The government is heavily reliant on indirect tax revenues and levies, potentially increasing economic pressure on consumers and businesses [1].
Rigid fiscal consolidation may stifle growth, focusing mainly on tax increases rather than broadening the tax base or boosting compliance [1][4].
Potential Remedies
A bold overhaul of tax administration and customs enforcement is essential to broaden the tax base and enhance compliance, reducing the strain on existing taxpayers and informal sectors [1][2]. Integrating the retail and real estate sectors into the tax net is crucial.
The National Tariff Policy should be paired with comprehensive structural reforms to streamline tariff structures, minimize distortions, and spur industrial growth. Without these reforms, the policy's impact on fiscal consolidation will be limited [1].
Optimizing non-tax revenues like State Bank of Pakistan profits and well-measured levies on petroleum and carbon can offer extra resources without overwhelming taxpayers [1].
While spending cuts are difficult to implement, enhancing public-sector efficiency and prioritizing development spending could more effectively allocate scarce resources, minimizing the risk of budget overspending [1][5].
Pakistan's FY26 budget battles a sizable fiscal gap amid a narrow tax base and limited space for expenditure reductions. Solutions center on deep tax reforms, strengthening administration, complementing tariff policy with broader structural changes, managing expenses efficiently, and capitalizing on non-tax revenue sources to achieve fiscal consolidation and sustainable growth [1][2][4][5].
Sources:[1] IMF Press Release No. 21/323, March 7, 2021. (https://www.imf.org/en/News/Articles/2021/03/07/pk-2021-letter-of-intent-economic-policy-statement-and-request-for-funding-013386)[2] World Bank, Pakistan Development Update (January 28, 2021). (https://www.worldbank.org/en/news/press-release/2021/01/28/pakistan-development-update-january-2021)[3] Policy Dialogue Report No. 4, Issue 1, (October 2020). (https://policydialogue.org/resources/pd-reports/pd-report-no-4-issue-1/)[4] Asian Development Bank (ADB) publication, "Pakistan Economic Update: Maintaining Momentum, October 2020." (https://www.adb.org/sites/default/files/publication/634211/adb-pakistan-economic-update-maintaining-momentum-october-2020.pdf)[5] World Bank, Pakistan: Prioritizing Public Investments (April 1, 2021). (https://www.worldbank.org/en/news/press-release/2021/04/01/pakistan-prioritizing-public-investments)
- The tight tax base and revenue deficit in Pakistan could lead to higher taxes, posing a risk to businesses and potentially stalling economic growth.
- To address the fiscal strain, a bold overhaul of tax administration and customs enforcement is necessary to broaden the tax base and enhance compliance, which would relieve the strain on existing taxpayers and informal sectors.
- Without comprehensive structural reforms, the National Tariff Policy may only have limited impact on fiscal consolidation, and the burden of adjusting to new tax measures could disproportionately impact consumers and businesses.
- To achieve fiscal consolidation and sustainable growth, Pakistan must explore non-tax revenue sources, such as optimizing State Bank of Pakistan profits and well-measured levies on petroleum and carbon, as well as prioritizing efficiency in public-sector spending and development investments.
